Value Line has initiated coverage of Connecticut Water Service (CTWS) in its flagship product, The Value Line Investment Survey. The utility was organized in 1956, and the company was incorporated in 1974. Connecticut Water provides service to more than 90,000 customers in Connecticut. In 2012, the company acquired two water companies in Maine that between them serve about 32,000 customers. Connecticut Water also has a nonregulated utility services business that can handle operation and maintenance, leak detection, and compliance reporting for its customers, and sells real estate that is not needed for its utility operations. These two businesses generate about 10% of the company’s revenues and earnings.
Growth through acquisitions is nothing new for Connecticut Water. The company has made 60 acquisitions in a 20-year span. These are typically small, municipally owned water systems. In contrast to the electric utility industry, most water service is provided by municipal utilities. When towns decide that they want to get out of the water utility business (often due to budgetary strains as the capital requirements to maintain a water system increase), they approach investor-owned companies such as Connecticut Water.
Like most utility stocks, the primary attraction of Connecticut Water is its above-average dividend yield. The company has a long record (42 years) of dividend growth, too. Likewise, as is typical for a utility issue, Connecticut Water is more stable than most equities. The utility is sound financially, and has an A rating from the credit-rating agencies. It enhanced its balance sheet through a common-equity offering in late 2012. This stock is most suitable for conservative, income-oriented investors. However, accounts stressing income should be aware that the yield of Connecticut Water stock (like that of most water utility issues) is well below the yields of most electric or gas utility equities. There are few publicly traded water utilities, and this scarcity is reflected in the valuation. Also, water companies are less sensitive to the state of the local economy.
With any regulated business comes regulatory risk. This is a capital-intensive business. Water utilities have high capital spending needs in order to replace aging pipelines, comply with water-quality regulations, and provide service to new customers, and it is not unusual for capital spending to exceed cash flow from operations. Connecticut Water and Maine Water must file rate cases from time to time in order to place capital investment in the rate base and ensure that the utilities are earning adequate returns on equity. The water business is sensitive to the cost of electricity, as the process of treating water uses a lot of power. Finally, the company’s business is sensitive to weather conditions. If the spring and summer are unusually rainy, this reduces customer usage.
For a more thorough look at Connecticut Water Service’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.